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COMPANY LAW

DIRECTORS
LECTURE 13

Charles Nicholson
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LEARNING OUTCOMES Students should be able: to explain the meaning of directors (D), their appointment , qualifications and removal. to describe the role of different types of D. to show an understanding of the rules that govern the office of D. to identify those aspects of power distributed between the BOD and the general meeting of shareholders. to demonstrate knowledge of the statutory and common law duties of a D. explain the remedies available for a breach to the co. and the penalties under the Co. Act.

DEFINITION Director includes any person occupying the position of a director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act and an alternate or substitute director s. 4(1). It includes a shadow director (D) and a de facto D. De facto D is a person who assumes to act as a D. He is held out as a D by the co., and he claims and purports to be a D, although not actually appointed as such. To establish that a person was a de facto D, it is necessary to prove that he undertook functions in relation to a co. which could properly be discharged only by a D. A de facto D will be subject to the usual duties of a D such as to act in the best interests of the co. and act with reasonable care and diligence.
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Shadow D is a person who is not formally appointed as a D; he does not claim or purport to act as a D. He is not held out as a D by the co. He is a person in accordance with whose directions or instructions the Ds of a co. are accustomed to act. To establish that a person is a shadow D, it is necessary to show that:(a) he directed the BOD how to act in relation to the co. (b) the Ds acted in accordance with such directions; and (c) the Ds were accustomed so to act. See: Millet J in Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 which was referred to in the case of Ravichanthiran a/l Ganesan v. Percetakan Wawasan Maju Sdn Bhd & Ors. [2008] 8 MLJ 450
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Governing D or Managing D is a full-time D who is actively involved in the management of the co. He is appointed by the BOD and is given very extensive/wide powers over the management of the co. -subject to the BODs authority - Arts. 91 93 Table A Chairman the person whom the Directors elect to chair their meetings. He signs the minutes of the meetings and presides as chairman of every general meeting of the co. Nominee D he is appointed to represent the interests of certain persons, viz. shareholders, employees or creditors. In the event there is any conflict between his duty to act in the best interest of the co. and his duty to his nominator, he is required to act in the best interest of the co. - s. 132(1E)

Executive D is both a full-time D and an employee of the co. Non executive (or independent) D they are not involved in the full-time management of the co. and are not employees of the co. They attend BOD meetings and are considered officers of the co. Independent Ds represent the interest of S/H and are free from management or other relationships which could interfere with the exercise of their independent judgement. They are custodian of the corporate governance process. Alternate D is a temporary substitute for one who may be absent from board meetings due to illness or other commitments. He has the same powers, rights, duties and responsibilities of a D.

APPOINTMENT AND QUALIFICATION

A co. is required to have at least 2 directors, each should have his principal or only place of residence in Malaysia s.122(1) They must be natural persons (be an individual and not a co.) & be of full age (18 years) - s. 122(2); The first Ds shall be named in the MA or AA of the co. - s. 122(3) They must consent to act as D of the co.- s. 123(4) No requirement that D must own or buy shares (a specified share qualification requirement) unless AA requires (Art. 71). If so, D must buy shares within 2 months after his appointment or such shorter period as is fixed by the AA s. 124 Public co.: separate resolution at general meeting to appoint every director unless members unanimously agree against such a rule s. 126(1). 7

DISQUALIFICATION

An undischarged bankrupt cannot act as a D except with the leave of the court. Otherwise he commits an offence s. 125(1). Penalty: 5 years imprisonment and/or RM 100,000. A person convicted of an offence in connection with the promotion, formation or management of a co. or for an offence involving fraud or dishonesty is disqualified from being a D for a period of 5 years after conviction. He will be guilty of an offence if he acts as a D or promoter or is in any way directly or indirectly involved with the management of a co. Penalty: 5 years imprisonment or RM 100,000 or both - S. 130

Where a D who has been a D of a co. that has gone into liquidation within 5 years of the date on which the first co. in which he was a D had gone into liquidation. Penalty: 3 years imprisonment and/or RM 10,000 s. 130A Art. 72 Table A provides situations whereby the D automatically vacates his post.

TERMINATION D can retire by rotation Art. 63 If D appointed for fixed term, D retire when time expires. D can resign by notice in writing Art. 72(e). Removal: a. If private co. removal of a D is governed by the cos A/A - Art. 69 pass ordinary resolution. b. If public co. members can pass ordinary resolution to remove D before the expiration of his period of office notwithstanding anything in A/A or any contract between the co. and him s. 128 c. Special notice (28 days notice s. 153) is required to be given to D of the intended resolution to remove him and to appoint some person in his place at the meeting. d. D has a right to defend himself and be heard on the resolution at the meeting. He can send copy of the representation to SH or require it to be read out at GM. 10

COMPENSATION TO DIRECTOR FOR LOSS OF OFFICE


Co. is not allowed to pay compensation to a D for loss of office or as consideration for his retirement S. 137(1) Unless: a. particulars of the amount is disclosed to SH; and b. approval has been obtained for the proposed payment by the co. in general meeting. Following are the exceptions as to payments: - S. 137(5) a. Payment made under an agreement entered into before the law took effect; b. Payment made under an agreement, particulars of which have been disclosed and approved by way of 11 special resolution;

c. It is a bona fide payment by way of damages for breach of contract; d. It is a bona fide payment by way of pension or lump sum payment in respect of past services which does not exceed total emoluments of D in the 3 years immediately preceding his retirement or death; Ngan & Ngan Holdings & Anor v. Central Mercantile Corp (M) Sdn Bhd [2010] 1 MLJ 822 CA e. Payment pursuant to an agreement made between D and the co. before D became a director of the co. as consideration to serve the co. as a director.

RHB Capital Bhd v. Tan Sri Dato Abdul Rashid bin Haji Mohamed Hussain [2006] 4 MLJ 80
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BOD AND GENERAL MEETING POWERS


Every co. has 2 organs BOD and GM. In practice BOD is conferred wide powers of management. S. 131B(1) & (2) and Art.73 the business and affairs of a co. must be managed by, or under the direction of, the BOD except those specifically given to GM. GM has specific powers and BOD has residual powers. GM cannot override decisions made by BOD or be involved in management Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame [1906] 2 Ch 34 John Shaw & Sons (Salford) Ltd v. Shaw [1935] 2 KB 113 the decision to commence legal proceedings was within the general powers of management provided in the cos A/A and the members could not override the boards decision.

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STATUTORY DUTIES OF DIRECTORS 1. A D of a co. shall at all times exercise his powers for a proper purpose and in good faith in the best interest of the co - s. 132(1) 2. A D shall exercise reasonable care, skill and diligence with (a) the knowledge, skill and experience which may reasonably be expected of a D having the same responsibilities; (objective standard) -132(1A)(a), and (b) any additional knowledge, skill and experience which the D in fact has. (subjective standard) s. 132(1A)(b)
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Business judgment rule s.132(1B)

Business judgment is defined in s.132(6) to mean any decision on whether or not to take action in respect of a matter relevant to the business of the company. S. 132(1B) - A director who makes a business judgment is deemed to meet the requirements of the duty under S.132(1A) and the equivalent duties under the common law and in equity if the director (a) makes the business judgment in good faith for a proper purpose; (b) does not have a material personal interest in the subject matter of the business judgment;
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(c) is informed about the subject matter of the business judgment to the extent the director reasonably believes to be appropriate under the circumstances; and (d) reasonably believes that the business judgment is in the best interest of the co.

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3. A D is under a duty against the improper use of co.'s property, position, corporate opportunity or to compete with the co. to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the co. - S. 132(2)

(a) (b) (c) (d)

A D or officer of a co. shall not, without the consent or ratification of a general meeting use the property of the co.; use any information acquired by virtue of his position as a D or officer of the co.; use his position as such D or officer; use any opportunity of the co. which he became aware of, in the performance of his functions as the D or officer of the co.; or

(e)

engage in business which is in competition with the co., to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the co. - S. 132(2)(a)-(e) Improper use is to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the co. There will be no breach of duty if the director obtains consent or ratification of the general meeting.

4. Duty to disclose interests in contracts, property, offices etc.

S. 131(1) a director who is in any way, whether directly or indirectly, interested in a contract with the co. shall declare his interest at a meeting of the directors of the co. S. 131(7A) - an interest of the spouse of a director of a co. (not being herself or himself a director of the co.) and an interest of a child, including adopted child or stepchild, of a director of the co. (not being himself or herself a director of the co.) in the shares or debenture of the co., shall be treated as an interest in the contract.

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S. 131(7B) Where a contract is entered into in contravention of this section, the contract shall be voidable at the instance of the co. except if it is in favour of any person dealing with the co. for any valuable consideration and without any actual notice of the contravention. Art. 81 further provides that a D cannot vote at the BOD meeting as regards the contract s. 131A - he cannot participate in the discussion & shall not vote but can be counted to make up the quorum (Art. 83 quorum may be fixed by Ds and unless so fixed shall be 2). Art. 72 (f) D can be removed for breach of such duty.

Substantial property transactions under s. 132C

Any transaction by Ds to acquire property of substantial value or to dispose of a substantial portion of the cos property requires the approval by the co. in a general meeting - S. 132C(1) Otherwise the contract is void unless it is in favour of the other party for valuable consideration and without actual notice of contravention - S. 132C(3) it protects a bona fide purchaser for value who has no notice of the Ds breach. The D involved shall be guilty of an offence under the Act S. 132(C)(5) 21

The meaning of the term substantial value/substantial portion depends on: a. For listed cos. refer to the Listing Requirements; b. Other cos if the value exceeds 25% of the total assets of the co; if the net profits from the transaction exceeds 25% of the total net profit of the co; or its value exceeds 25% of the issued share capital of the co., whichever is the highest. A D under this section includes the chief executive officer, the chief operations officer, the chief financial officer or any other person primarily responsible for the operation or financial management of the co.- s.132(C)(6)

Issue of shares by Co. S. 132D

BOD decides initially on the issue shares the number, terms of issue and subscription price but it must then get the prior approval of the co. in general meeting before the shares are issued s. 132D(1); Art. 73 This is to protect SH so that BOD do not act without SH knowledge and consent Jimat bin Awang v Lai Wee Ngen [1995] 3 SLR 769. Even if prior approval is obtained, the power to issue shares must be exercised for a proper and bona fide purpose and must not be used for a collateral purpose. Howard Smith Ltd v. Ampol Petroleum Ltd [1974] AC 821, Privy Council; Cheah Ngun Ying v. Low Cheong & Sons Sdn Bhd & Ors [2010] 9 MLJ 385 HC
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Substantial property transactions by D, connected persons or substantial s/h - S. 132E

A co. cannot transfer substantial assets (non-cash assets) to a D, connected persons or substantial SH unless prior approval obtained from GM. Otherwise, the transaction is void s. 132E (1) & (2). D/connected persons/substantial SH cannot vote on the resolution to approve the transaction - s. 132E (3) A person connected with a D s. 122A a member of Ds family; a body corporate associated with D - s. 122A(3); a trustee of a trust under which D or a family member is a beneficiary; a partner of D or a partner of a person connected with D. substantial SH

A substantial SH one who has 5% or more of the voting shares in the co. - s. 69D Value of the asset: a. Listed co. refer to Listing Requirements; b. Other cos. exceeds RM250,000; or if the value does not exceed RM250,000 but exceeds 10% of the cos asset value provided it is not less than RM10,000.

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The fiduciary duties of a D

Every D is under a fiduciary duty to act in the best interest of the co. (common law duties and statutory duties under the Co. Act). Trust and confidence is reposed on Ds.

1. duty of care, skill, and diligence 2. duty to act in good faith in the best interest of the co. 3. duty to act for a proper purpose 4. duty to avoid conflict of interest 5. duty to retain discretion 6. duty to disclose at GM.

The duty to exercise care, skill and diligence s. 132(1A)

Laid down in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. The case summarises the common law duties of a director in relation to care and skill. Romer J in his judgement states the general proposition on duties of skill and care:-

1. A D is required to exhibit in the performance of his duties, the degree of skill that may reasonably be expected from a person of his knowledge and experience. A D of a life insurance co., for instance, does not guarantee that he has the skill of an actuary or of a physician. But if a D possesses special qualifications, e.g. a lawyer or accountant, he is expected to use that skill for the co.
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A D subjectively sets his own standard of skill and care. The more knowledge he has, the more is expected from him and higher is the standard of skill and care expected from him and vice versa. See: Dorchester Finance Co Ltd v. Stebbing [1989] BCLC 498

2. A D is not bound to give continuous attention to the affairs of the co. His duties are of an intermittent nature to be performed at periodical board meetings and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. See: Re Cardiff Bank: Marquis of Butes Case [1892] 2 Ch. See: Art. 72 cannot be absent for more than 6 months for meetings without permission of BOD. Daniels v. AWA Ltd (1995) 13 ACLC 614

3. Duties with regard to the exigencies of the business and

the A/A, may properly be left to some other official. A D is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. Dovey v. Cory [1902] AC 477 See: s. 132(1F). Jurong Readymix Concrete v. Kaki Bukit Industrial Park [2000] 4 SLR 723 A D executed a guarantee on behalf of the co. without obtaining any legal advice. He did not peruse the guarantee document or consult other directors of the co. It was held that the D was in breach of his duty of care to the co.

Daniels v. AWA Ltd (1995) 13 ACLC 614, the NSW CA proposed the following as the minimum standard of care, skill and diligence expected of all Ds:A D must acquire a basic understanding of the business of the co. and must be familiar with the fundamentals of the cos business; A D is under a continuing obligation to keep informed about the activities of the co; Detailed inspection of day-to-day activities is not required but what is required is a general monitoring of the cos business affairs. Accordingly, a D should attend board meetings regularly; While they are not required to audit the cos books, they should be familiar with the financial status of the co. by a regular review of its financial statements.
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Standard depends on circumstances and responsibilities of D National Mutual Life Nominees Ltd v Worn (1990) 5 NZCLC 66 Higher standard expected of executive D than nonexecutive D AWA Ltd v Daniels (1992) 10 ACLC 933.

The duty to act in good faith in the best interest of the co. - s. 132(1)

D must act bona fide in the interest of the co. Re Smith and Fawcett Ltd [1942] 1 All ER 542 Directors must exercise their discretion bona fide in what they consider, not what the court may consider, is in the interests of the company and not for a collateral purpose Lord Greene. What this rule amounts to is this: everything that a director does as a director must be done to promote or advance the interests of his co.

Whether or not a director has acted for the benefit of the co. depends on the objective test. The standard required for a bona fide act was provided by Pennycuick J in Charterbridge Corporation Ltd. v. Lloyds Bank Ltd [1970] Ch 62, 74. whether an intelligent and honest man in the position of the director of the co. concerned, could, in the whole of the existing circumstances have reasonably believed that the transaction was for the benefit of the co..

This test was adopted by Thean J. in Intraco Ltd. v. Multi-Pak Singapore Ltd. [1995] 1 SLR 313 CA and applied also in Kawin Industrial Sdn Bhd (in liquidation) v. Tay Tiong Soong [2009] 1 MLJ 723 (High Court).

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The duty to act for a proper purpose - s. 132(1) An element of fiduciary duty placed upon directors is to exercise their powers for the proper purposes for which they were conferred i.e. bona fide in the interest of the co. and for no other or collateral purpose.

A director uses his powers for a collateral purpose if he exercises his powers conferred by the articles for purposes other than those for which they were intended and to do so would be an abuse or improper use of his powers and a breach of duty the exercise of the power will be held to be invalid.
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a. Power to issue shares is to raise capital Punt v. Symons & Co. Ltd [1903] 2 Ch 506; In order to secure the passing of a special resolution, the directors had issued new shares to 5 additional members. The shares were not issued bona fide but with the sole object and intention of creating voting power necessary to carry out the proposed alteration in the articles. This was held to be an abuse of their powers. Byrne J. said: A power of this kind exercised by the Directors in this case, is one which must be exercised for the benefit of the co: primarily it is given to them for the purpose of enabling them to raise capital when required for the purposes of the co.

See also: Howard Smith Ltd v. Ampol Petroleum Ltd [1974] AC 821, Privy Council - where the shares were allotted solely to avoid a takeover by one group of SH by diluting their majority shareholding.. Cheah Ngun Ying v. Low Cheong & Sons Sdn Bhd & Ors [2010] 9 MLJ 385 High Court

b. Power to refuse to register a transfer of shares must be for co.s interests Australian Metropolitan Life Assurance Co Ltd v. Ure (1923) 33 CLR 199.

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Cheah Ngun Ying v. Low Cheong & Sons Sdn Bhd & Ors [2010] 9 MLJ 385 HC Mohd Hishamudin J When the BOD of the defendant co. decided to allot and issue shares to the other shareholders, the Board knew that by so doing Low Lai Kuis (plaintiffs husband) shareholding in the co. would be reduced or diluted. It would render his majority control of 52% to about 42%. The law with regard to the exercise of the powers of the directors to issue shares is that such power is a fiduciary power and must be exercised bona fide for the interest of the co. (Howard Smith Ltd v Ampol Petroleum Ltd & Ors [1974] AC 821).

The power to allot and issue shares under Article 5 of the cos articles must be used for a proper and bona fide purpose. Here, that power was used for a collateral purpose. The power was not applied equally but selectively where shares were allotted and issued to all the other shareholders in proportion to their respective shareholding, but no shares were allotted or issued to Ps husband, Low Lai Kui, or his estate. The direct effect of such an exercise of power by the directors was that Low Lai Kuis family lost their majority in, and control of, the co..

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The duty to avoid conflict of interest - s. 131

The general rule is that a D must not place himself in a position where his duty owed to the co. and his personal or financial interest conflict. See: Lord Herschell in Bray v. Ford [1896] AC 44, House of Lords. If a D obtains a benefit in circumstances where there could have been a conflict of interest, he is accountable to the co. for that benefit unless he has disclosed it and obtained the approval of the co.

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Whenever a director has personal interests that possibly may conflict with those of the co., disclosure must be made to the shareholders and their ratification obtained. The director's interests and those of the co. possibly may conflict when a reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict. The test is thus objective i.e. would a reasonable man think that a conflict is possible? See: S. 131(1) a director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the co. shall declare his interest at a meeting of the directors of the co.

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It is irrelevant that the co. did not incur any losses due to the breach of duty. Industrial Development Consultants Ltd. v. Cooley [1972] 2 All ER 162, PC. C, an architect, was MD of the plaintiff co.. They were building and development consultants. He took part in negotiations with the Eastern Gas Board in trying to secure for the co. contracts to build 4 large depots but EGB was not satisfied with the plaintiffs set-up and refused to award the contracts to it. EGB then approached C and invited him to be the Project Manager for the projects in his private capacity. C did not disclose this to IDC. He resigned from IDC by falsely representing that he was of ill health, and was later given the contracts by EGB.
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The court held that C had to account for the profits he had made in breach of his fiduciary duty to IDC. C was guilty of putting himself in a position in which his duty to the co. and his self-interest grievously conflicted. Although, the plaintiff was getting a benefit which it would not have otherwise got, the alternative would be to allow C to retain a profit made by him in breach of his duty to the co. which the court was not prepared to do.

See also: Magnifine Sdn Bhd v. Yap Mun Him [2005] 6 CLJ 413

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Directors having interest in the party dealing with the co. Aberdeen Railway Co v. Blaikie Bros (1854) 1 Macq 461 (House of Lords). A railway co. made a contract for the purchase of a large quantity of iron chairs from a firm in which the chairman of the co., Mr. Blaikie, was also its managing partner. The co. refused to accept the chairs arguing that the contract was voidable owing to the chairmans interest in the supplier firm. The court ruled that a director must not have a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect . The co. was not bound by the contract. Blaikie was bound by his duties to the co. to obtain the chairs at the lowest possible price for the co. However, as a partner of the firm he was personally interested in obtaining the highest price possible from the co. This is the very evil against which the rule in question is directed.

The duty against the use of cos property, opportunity etc. s. 132(2)

Duty against the improper use of co.'s property, position, corporate opportunity or competing with the co. s. 132(2). A director cannot make use of a co.s property, or opportunity or information for himself or make secret profits Cooks v. Deeks [1916] 1 AC 554, Privy Council (Supreme Court of Ontario, Canada). The defendants, 3 of the 4 directors (TR Hinds, GS Deeks & TM Deeks) of the Toronto Construction Co., resolved to break their business relations with Cook, the fourth director. The co. had satisfactorily performed a series of construction contracts with the Canadian Pacific Railway Co. The last of these contracts, the Shore Line contract, was negotiated 44 in the same by two of the Ds.

When the arrangement was completed, the 3 Ds formed the Dominion Construction Co. and took the contract for themselves. They also passed a resolution to confirm that the co. had no interest in the contract. Cook, the minority shareholder, successfully sued the directors for a breach of duty and the Court allowed the Toronto Construction Co. to recover the profit from the contract. The directors are not at liberty to sacrifice the interest of the co. they are bound to protect, and while ostensibly acting for the co., divert in their own favour business which should properly belong to the co. they represent.

Regal (Hastings) Ltd v. Gulliver [1942] 1 All ER 37 HL Regal was in the business of running cinemas. They owned a cinema in Hastings. They wanted to acquire the leases of 2 other cinemas. So they incorporated a subsidiary co. called Hastings Amalgamated Cinemas Ltd (HAC) for this purpose. The landlord of the cinemas insisted on either a personal guarantee of the rent from the directors, or that HAC should have a paid-up capital of 5,000. Regal could only pay for 2,000 1 shares in HAC. The directors of Regal did not wish to give personal guarantees. They agreed to take up the remaining 3000 shares between themselves. The 4 directors each subscribed for 500 shares. The Chairman, Gulliver, got outsiders to take up 500 shares and the remaining 500 shares were offered by the Board to Garton, the cos solicitor.
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The deal to acquire the cinemas did not go through. The defendants then sold all the shares in the 2 companies to purchasers. They sold HACs shares for 3.80 per share making a profit of 2.80 per share. Regal now under the control of the purchasers filed an action for breach of fiduciary duty claiming reimbursement of this profit from the 4 directors and Gulliver and Garton. The defendants had acted honestly in what they did. They contended that it was impossible for Regal to take up all the shares in HAC. But the House of Lords refused to accept this argument. The 4 directors were held severally liable to account for the profits they made. The opportunity to obtain these shares had come to them by reason and only by reason of the fact that they were directors of Regal and in the course of the execution of their fiduciary duties.

Further Duties

The duty to retain discretion. They have to be independent in making decisions. There should be no limitations or restrictions placed by the previous directors on the discretion of the present directors. The restrictions would apply only if found in the Co. Act, MA or AA. Thorby v. Goldberg (1964) 112 CLR 597. Cannot accept bribe or secret profits Boston Deep Sea Fishing & Ice Co v. Ansell (1888) 39 Ch, D 339. Cannot misuse companys funds Cannot misuse confidential information - s. 132(2) Cannot compete with the co. s. 132(2)

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Remedies for a breach of duty

Remedies for a breach of duty bring action for damages/compensation, account of profits, rescission of contract and return of property. Exoneration for breach of duty by: 1. members: allowed Furs Ltd v. Tomkies (1936) 54 CLR 583 2. a clause in the A/A to exempt the D for breach of duty for negligence is void s. 140(1). To exempt the Ds from liability for losses caused by their own wilful neglect or default. 3. court may relieve the D if he had acted honestly and reasonably s. 354 -Yeng Hing Enterprise Sdn. Bhd. v. Dr. Ong Poh Kah [1988] 2 MLJ 60 Supreme Court
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Re City Equitable Fire Insurance Co. Ltd [1925] Ch 407 The case summarises the common law duties of a director in relation to care and skill. Here the litigation arose because in the winding-up of the co., 1,2000,000 was found to have been lost by the co. owing partly to the failure of certain investments but mainly to the frauds of the chairman of directors, Bevan, a daring and unprincipled scoundrel who was then duly convicted. In this action, the liquidator also sought to make the other Ds liable for the losses on the ground of negligence for allowing the cos money to be dissipated in various ways such as declaring unwise dividends and allowing poor investments to be made and failing to prevent the chairman from acting fraudulently. In fact, the Ds were held to have been negligent but they escaped liability because the A/A contained a provision which exempted the Ds from liability apart from losses caused by their own wilful neglect or default. (s.140(1) CA 1965 makes such provisions void).

Dorchester Finance Co. Ltd. v. Stebbing A moneylending co. had 3 Ds, Stebbing, Parsons & Hamilton. S worked full time for the co. The other 2 paid very little attention to it and visited its premises only rarely. The 2 Ds signed blank cheques at Ss request, with which S made loans that were illegal and accordingly irrecoverable. No board meetings were held. All 3 Ds were held liable in negligence and had to make good the loss to the co. The judge took into account the fact that the 2 non-executive Ds had considerable accountancy experience, and stated, For a chartered accountant and an experienced accountant to put forward the proposition that a non-executive D has no duties to perform, I find quite alarmingthey not only failed to exhibit the necessary skill and care in the performance of their duties as Ds but also failed to perform any duty at all as Ds of Dorchester .

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In Dovey v. Cory [1902] AC 477, a D relied on the judgement and advice of the chairman and general manager of the co. when he assented to the payment of dividends and to loans from the cos funds. He had no reason to doubt the balance sheets that were presented to Board meetings nor did he have any reason to doubt the competence of the general manager. In fact the dividends were paid out of capital and the loans were made without proper security. When the co. was wound up, the liquidator attempted to make D liable for the losses incurred. The House of Lords held that D was not negligent. Business life could not go on if people could not trust those who are put in a position of trust for the purpose of attending to details of management.

Howard Smith v. Ampol Petroleum [1974] AC 821, PC There were rival takeover bids for the shares of RW Miller (Holdings) Ltd., the target co. The rivals in this takeover bid was Howard Smith and Ampol Petroleum. Ampol and an associated co. (Bulkships) together already held 55% of Millers shares. So as things stood, HS could not possibly make an effective takeover. The directors of Miller were of the opinion that it would be in the best interest of the co. to be taken over by HS since they were unsure what would happen to the co. if Ampol took further control. So they issued 10 million worth of new shares to HS. This served 2 purposes:1. it provided Miller with the much-needed capital to finance the completion of 2 tankers, and 2. it converted or diluted Ampols shareholdings from a majority one to a minority one and therefore made the HS takeover bid likely to succeed.

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Ampol brought this action to set aside the issue of shares. They challenged their validity. There was a general power in Millers A/A which gave power to the Ds to issue shares to such persons at such time and under such conditions as they thought fit. Although the issue of shares were intra vires, it nevertheless impose a fiduciary duty on the part of the D. When the case came up for hearing at the first instance, 2 facts were found by the judge :1. that there was no element of self-interest on the part of the directors; and 2. that the main reason for the allotment of the shares was not to increase the capital of the co. but to defeat the takeover bid by Ampol by diluting their majority shareholding.

The judge set aside the allotment of the shares to HS. On appeal by HS, the Privy Council, upheld the decision. It held that the shares were allotted solely to avoid the takeover by Ampol. The absence of self-interest did not necessarily mean that the defendants acts were in accordance with the purposes for which the powers were conferred. Self-interest is only one example of improper motive. If a particular exercise of the power is challenged, it is necessary for the court to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that substantial purpose was proper or not.
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COMPANY SECRETARY

Every co. must have at least one secretary who must be a natural person of full age and has his principal place of residence in Malaysia - S.139(1). He must be a member of a professional body prescribed by the Minister or licensed by the Registrar - S.139(A). The first secretary of the co. must be named in the MA or AA. Later secretaries are appointed by the BOD S.139(1A) & (3) He is an officer of the co. s. 4(1)

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Previously they were considered as clerical who had no power to bind the co. contractually Newlands v National Employers Accident Assoc (1885) 54 LJ (QBD) 428; Ruben v. Great Fingall Consolidated (1906) AC 439. Now they are considered as chief administrative officers with implied authority to enter into contracts relating to administrative matters. Not management matter. Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711.

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AUDITORS Every co. must appoint an approved auditor to audit its financial reports. To be done before the first AGM of the co. s. 172(1) Appointment is until the conclusion of the next AGM. Eligibility registered as a public accountant with Malaysian Institute of Accountants and approved by Minister of Finance s. 8. Function carry out audit and present reliable, independent report on companys accounts and financial position whether it gives a true and fair view of the companys financial affairs. Report attached to accounts and given to SH and lodged with the Registrar. Provides a degree of protection to SH, creditors and prospective SH.
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